Antidilution, Preemptive Right

Lesson

Antidilution rights protect shareholders from diluting their ownership percentage in a company when new shares are issued. Preemptive rights allow existing shareholders to maintain their proportional ownership in a company by enabling them to purchase additional shares before they are offered to the public.

Practice Question #1

Which of the following best describes antidilution rights?

A) The right to sell shares at a specified price

B) The right to maintain proportional ownership in a company

C) The right to convert securities into shares of a company's stock

D) The right to purchase a company's stock at a specified price

Select an option above to see an explanation here.

A) This describes a warrant, not antidilution rights. B) Antidilution rights protect shareholders from diluting their ownership percentage when issuing new shares. C) This describes convertible securities, not antidilution rights. D) This describes a stock option, not antidilution rights.

Terms

Antidilution:: A provision that protects shareholders from diluting their ownership percentage when new shares are issued.
Preemptive right:: The right of existing shareholders to maintain proportional ownership in a company by purchasing additional shares before being offered to the public.
Dilution:: A decrease in the ownership percentage of a shareholder due to the issuance of new shares.
Shareholder rights:: The rights and privileges granted to a company's equity securities owners.

Practice Question #2

What is the primary purpose of preemptive rights?

A) To protect shareholders from the dilution of their ownership percentage

B) To give shareholders the right to sell shares at a specified price

C) To allow shareholders to convert securities into shares of a company's stock

D) To give shareholders the right to purchase a company's stock at a specified price

Select an option above to see an explanation here.

A) Preemptive rights allow existing shareholders to maintain proportional ownership in a company by purchasing additional shares before being offered to the public. B) This describes a warrant, not preemptive rights. C) This describes convertible securities, not preemptive rights. D) This describes a stock option, not preemptive rights.

Historical Example

In the early 2000s, a large technology company issued new shares to raise capital for expansion. Existing shareholders were concerned about diluting their ownership percentage, so the company included antidilution provisions and preemptive rights in the stock offering. This allowed existing shareholders to maintain their proportional ownership in the company by purchasing additional shares before they were offered to the public.

Practice Question #3

Which of the following is NOT a characteristic of equity securities?

A) Ownership in a company

B) Antidilution provisions

C) Preemptive rights

D) The right to purchase a company's stock at a specified price

Select an option above to see an explanation here.

A) Equity securities represent ownership in a company. B) Antidilution provisions are characteristic of equity securities. C) Preemptive rights are characteristic of equity securities. D) The right to purchase a company's stock at a specified price describes a stock option, not a characteristic of equity securities.

Real-World Example

A small startup company issues new shares to raise capital for a new project. The company's founders, the largest shareholders, want to maintain control over the company. So they negotiate for antidilution provisions and preemptive rights in the stock offering, allowing them to purchase additional shares before they are offered to the public and maintain their proportional ownership in the company.